Erik Berglof: Diversification is under way, but China still has an edge

Key points by Erik Berglof, Director of the Institute of Global Affairs of London School of Economics, at the Caixin Global Webinar: How the Coronavirus Could Impact Global Supply Chains on March 11th.

The global supply chains are constantly changing.

• Some of the changes reflect technological shifts, such as the shift from transport of goods and services to transport of information, and that changes how these supply chains operate.

• Changes are also caused by increased fragmentation. The supply chain is divided into many more steps.

• Robotization and AI affect localization of activities.

China is now less dependent on the world, while the world is more dependent on China.

• China has become the center of global value chains. What happened to global value chains over the last 10 years is very much driven by what happened to China.

• China has started producing more and more of intermediary goods. So ironically, the cross-border global value chains have actually reduced in importance. Through increased vertical integration, China has actually reduced its dependence on the rest of Asia.

• European companies have become increasingly dependent on China and less dependent on the value chains within Europe. In U.S., the increased import of intermediates is largely affected by what China has done.

China will recover from the outbreak pretty quickly.

• The nature of the shock to the Chinese production by the coronavirus is in many ways different from SARS. SARS hit a more sensitive part of the Chinese economy in terms of export.

• China is now coming out of this situation; there will be a very quick recovery, aided by measures by the government. Companies will start producing to recover their inventories that have been drawing down over the last three months.

• China as the exporter of critical medicine, antibiotic and protective equipment, will not use its status as a tool. Instead it will offer to supply other countries protective equipment, just like it did for Italy.

A decoupling in terms of technology and FDI has been reinforced by the virus outbreak.

• It is very hard to quantify what will be the coronavirus’ impact and how difficult it will be to recover.

• However, the exacerbation of the decoupling is probably the most serious outcome of this crisis.

The supply chain diversification strategy is already an ongoing trend before the virus came.

• The virus has been a wakeup call to many producers. But it also depends a lot on the specifics of the industry the producer is in.

• China is climbing up the value chain, producing more and more intermediaries. It is more difficult to have a dual supply of highly differentiated products.

• There surely will be more diversification. The impact would not be trivial, but the impact shouldn't be exaggerated as well.

Impact forecast by sectors:

• Electronics, machinery and textiles, are the most exposed.

• China's automotive industry is also very much affected, but it actually was in the face of a weakening demand.

• One should remember that this outbreak produces a shock to supply and simultaneously a shock to demand. So in some cases, these things will sort of compensate each other. It will be a loss in GDP, but it may not be so serious in terms of the supply effect.

Impact forecast by region:

• Japanese, Korean, and Taiwanese companies are the most affected.

• Vietnam is the most affected country, the one most dependent on China's exports.

• EU’s dependency on China has increased, but that's mostly in consumer goods. The disturbances in terms of production will be with much less.

The global supply chain will resume to full capacity by May-June.

• We're going to see quick rebound of the Chinese economy.

• There will be measures taken to create redundancy in the supply chain, which will take a bit longer.

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